A. Find entry points to the market as soon as possible.
B. Find exit points that assure us the maximum benefit.
C. Avoid false input and output signals.
If we achieve these last points we will have achieved a profitable trading system. To carry out these points we will need the following:
1. Choice of time frame
This is a vital decision in strategy and will depend on both our psychology and the time we have available to be in front of a screen. If we have enough time maybe we are more interested in operating in time frames of 5.15 or 30 minutes or on the contrary we can compensate a strategy in time frame of 4 hours or 1 day and review the quotes a few times a day and The rest of the day have the screen off.
On the other hand and not least the strategy that we use and works for us often works correctly only in certain time frames so somehow the chosen strategy marks our optimal time frame to operate.
2. Choice of currency pair
Each currency pair usually has its own personality in the sense that it has a characteristic behavior that makes it unique. There are currency pairs that are very active like the GBP / USD or GBP / CHF and others are of a more consistent trend like the EUR / JPY or EUR / GBP.
Each currency pair usually has a few hours of greater activity than others so we must identify them to obtain the greatest gains possible in the operation.
3. Choose the necessary indicators
There are many indicators and tools available in Forex but not all of them can signal the fastest entry to the market and the goal of a trader is to enter the market as soon as possible in order to take full advantage of the price swing.
Among the indicators that can provide a faster signal on changes in the market are the EMA (exponential moving average), SMA (simple moving average), parabolic SAR, stochastic, MACD among others. The key is to correctly understand how the indicator works and what its principles are.
It is very common to use the EMAS crossing to detect a trend change as well as Stochastic and the MACD indicator.
4. Choice of indicators to detect false input signals
Once we have clear the time frame, the currency and the indicators we are going to use it is time to filter out those false input signals to the market that could ruin our strategy.
It is very common in Forex or use the same indicator in different settings to see if they match such as if we are using an EMAS junction of 5 and 10 periods we could use an EMA of 20 periods to confirm the entry so that once EMA 5 crosses EMA 10 (input signal) we expect it to reach EMA 20 (confirmed signal) to enter the market.
Another way to filter false signals is the MACD indicator. This indicator if used correctly can greatly help forex to filter out false signals. The default setting for the MACD indicator is 12,26,9.
The RSI indicator is also often used to filter false signals.
5. Find points of entry and exit.
Once the signal is confirmed it is time to see how far we can go and the benefit we can expect.
There are two classic forms of entry to the market once the signal is confirmed. One is to enter as soon as the signal is confirmed without waiting for the current candle to close. The other is to wait for the candle to close and enter the market on the next candle if the conditions have not changed and the input signal remains and its confirmation. Obviously the first option is much more risky but it allows ahead of other traders entering the market before.
For the output signal you can use a certain amount of pips that you want to gain in the operation (for example 25 pips). The Stop Loss can be configured in the same way or use tools that allow us to identify the supports and resistances in the graphs and calculate from there the distance in pips from the entrance to the market.
In forex losses are inevitable even in the best trading system so we have to be clear how much we are willing to risk or lose in each transaction beforehand.
6 . Calculation of risks in each operation
Normally the strategies are designed so that in case the market advances in our favor we earn at least twice what we would lose if the market goes against us. We must enter the market only when we have identified a good opportunity to make a good profit.
This is a basic concept of Money Managemet. If you want to make a profit on any forex system you must take into account the basic rules of Money Management that help us to control the risk. If you want to know more about this you can go to our arículo where we deal with the basic rules of Money Management.
7. Testing the system in a demo account
The moment of truth arrived, the moment of the great test. Once we test our strategy on a demo account we can identify whether it is profitable or not and we have the possibility to optimize it.
The first thing is to open a demo account in a broker forex so that we can see the test as our strategy responds. The test should not be less than 3 or 4 months for the results to be conclusive and this is so because in Forex currencies go through certain periods in which their behavior changes.
If we move to a real account before that time it would be disappointing to check that the system is not profitable because it has not been tested in different periods of behavior of the currency pair with which we operate.